Presentation slides: Emerging trends in real estate® Europe ... - PwC

Brian MoranChair of European Urban Regeneration Council,Urban Land InstituteEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 3

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Emerging Trends in Real Estate EuropeHighlights 2007 - 2011

2007“If 12 o’clock is the top of the cycle, weare at five or ten minutes to 12”2008“Fear is back”2009 “The going gets tough”2010 “Expect a long, slow haul.”2011 “Adapt or die”

……so whatabout this timenext year?“…………………….”...2013?

…..2012• the state of the market;• the state of the economy;• the availability of equity;• the availability of debt;• regulation;• cities;• asset types.

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….2013?“We’re going to need a bigger bazooka to get out ofthis mess”“The game has started and most people missed thewhistle”“If you are not dead by now, you have adistinct advantage”

Irish Commercial Property Outlook 2012Guy HollisManaging Director, CBREMarie HuntHead of Research, CBREEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 26

IRISH COMMERCIALPROPERTY OUTLOOK 2012GUY HOLLIS & MARIE HUNT, CBREFebruary 2012

AgendaMarie Hunt, Executive Director, CBRE Ireland1 ECONOMIC BACKDROP2 OCCUPIER MARKETS• The Office Market• The Retail Market• The Industrial MarketGuy Hollis, Managing Director, CBRE Ireland3 CAPITAL MARKETS• Domestic Investment Market• The Hotels Market4 TOP 10 PREDICTIONS FOR 2012

Economic Backdrop - Marie Hunt

The Irish EconomySTRENGTHS• Have delivered on fiscal targets ofIMF/EU/ECB in all four quarters of 2011• 12.5% corporate tax rate supportingmultinational investment and expansion• Huge improvement in competitiveness• Export performance holding up wellOPPORTUNITIES• General acceptance of severe austeritymeasures put in place to restore the publicfinances• Multinational investment continuingregardless of economic backdrop• Improvement in competitiveness coupledwith 12.5% corporate taxWEAKNESSES• National debt and fiscal deficit concerning• Domestic economy very susceptible to widerissues in the Eurozone• Rumours/speculation about a ‘second bailout’• IMF/EU/ECB intervention has created verynegative sentiment about Ireland• Virtually no liquidity in the Irish bankingsystemTHREATS• ‘Second bailout’• Implementation of a financial transactionstax at EU level would dampen multinationaldemand• Any change to 12.5% corporate tax ratewould be unwelcome

Occupier Markets - Marie Hunt

Office Take-up in Competing CitiesRolling annual take-up to end Q3 2011180160140120Take-Up Sq M100806040200Dublin Manchester Edinburgh Birmingham GlasgowSource | CBRE ResearchCBRE | Page 32

2011 Dublin Office Take-up by NationalityOther7%(26 lettings)UK5%(11 lettings)Unknown4%(11 lettings)Ireland46%(90 lettings)US38%(38 lettings)Source | CBRE ResearchCBRE | Page 33

Dublin Annual Office Take-up vs. Vacancy162,500 Sq M. let in Dublin in 2011Vacancy remaining stubbornly high at almost 23%300,00025%250,000Take-upVacancy20%Take-up Sq M200,000150,000Average Annual Take upc.163,500 sq m(f)15%10%Vacancy Rate %100,00050,0005%02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(f)0%Source | CBRE ResearchCBRE | Page 34

Vacant Office Accommodation By District Q4 2011Grade A Secondary Needs Significant Refurbishment Georgian300637659Overall Vacancy Rate = 22.96%Vacancy Rate Dublin 2/4 = 16.8%Suburban Vacancy Rate = 23.1%Thousands Sq M2001001231433256South Suburbs = 14.0%196876507788120Dublin 2/4Dublin1/3/7SouthSuburbsWestSuburbs41NorthSuburbs13Dublin 6/817IFSCSource | CBRE Research

The Office MarketSTRENGTHS• Strong performance in 2011 despiteeconomic conditions• Continued demand for accommodation inmany sectors fuelled by 12.5% corporatetax rate• Development pipeline controlledOPPORTUNITIES• Lack of new development will result in primerents stabilising during 2012• Scarcity of Grade A accommodation willultimately lead to prime rents increasing• Lease re-gearing opportunities – benefitsfor landlords and tenantsWEAKNESSES• Take-up expected to ease in 2012 as somestrategic decisions put on hold• Continued polarisation between prime andsecondary• Secondary rents will continue to decline• Prime rents will stabilise at €296 per sq mfollowing 55% decline from peak• Any decline in vacancy will be gradualTHREATS• Demand will be adversely affected ifeconomic prospects deteriorate further• Financial transactions tax legislation couldput Ireland at a significant disadvantage• Retention of 12.5% corporate tax rate• Further consolidation of Government andbanking sectors could impact on vacancy• Obsolescence becoming a significant issue

Source | Central Bank/IBFC redit G rowth (Y OY )

Consumer Spending 2006-201115%10%All Retail Y/YRetail Excl. Motors Y/Y5%0%-5%2006 M012006 M042006 M072006 M102007 M012007 M042007 M072007 M102008 M012008 M042008 M072008 M102009 M012009 M042009 M072009 M102010 M012010 M042010 M072010 M102011 M012011 M042011 M072011 M10-10%-15%-20%-25%-30%Source | CSO

STRENGTHS• Range of new entrants looking to open newstores in the jurisdiction• Existing retailers taking advantage ofmarket conditions to pursue expansion andrelocation strategies and grow market share• Healthy levels of letting activity continuing ingood retail schemes and locations• Savings ratio increasingOPPORTUNITIES• Some retailers finally seeing turnover andcost bases stabilising following 3 difficultyears• Opportunities for tenants to negotiate veryfavourable transactionsWEAKNESSESTHREATSThe Retail Market• Particularly susceptible to economicconditions and lack of credit• Little prospect of a meaningful recovery inconsumer demand or retail sales in 2012• Decision not to proceed with upward onlyrent review legislation will force someretailers to reassess their options• Some retailers cannot access the locationsthey want due to lack of new supply• 2% increase in VAT in Budget 2012 will puthuge additional pressure on margins• Increase in cross border shopping• Impact of E-commerce & M-commerce• Value of secondary and provincial retailproperties could deteriorate further• Some high-profile administrations/closures

Dublin Industrial Take-Up 2002 – 2012(f)350,000300,000Take - Up Sq M250,000200,000150,000100,000(f)50,000020022003200420052006200720082009201020112012(f)

STRENGTHS• Take-up continuing to be achieved althoughnegotiations protracted• Lack of speculative development helping toerode overhang of accommodation in manylocations• Prime industrial rents will stabilise in 2012at between €60 and €65 per sq mOPPORTUNITIES• A number of acquisition requirements frommultinational pharmaceutical companiesand data centre operators who are notdirectly exposed to the economic situation• Scarcity of modern accommodation willultimately lead to a recovery in prime rentsThe Industrial MarketWEAKNESSES• Take-up expected to decline in 2012 toapproximately 135,000 square metres• Lack of credit impacting on ability topurchase industrial facilities• Most transactions comprise short-termlettings at low rents• Weak demand for industrial sites despiterelatively attractive pricingTHREATS• Gap between rents for prime and secondaryaccommodation continuing to widen• Obsolescence becoming a significant issuein this sector

RETAILPrime Rent ForecastsPeak February 2012 TrendingPrime RentPrime Rent€ per sq m € per sq mSHOPSPrime High Street Zone A 10,000 5,000 StableGood Secondary High Street Zone A 7,500 4,250 StablePrime Provincial High Street 4,500 3,500 WeakerSHOPPING CENTRESPrime Zone A 3,900 3,250 StableSecondary Zone A 2,800 2,000 WeakerRETAIL WAREHOUSESPrime 360 242 StableSecondary 320 215 WeakerOFFICESPrime City Centre Dublin 673 296 StableSecondary City Centre Dublin 377 194 WeakerSuburban Dublin 296 172 WeakerPrime Provincial 270 135 WeakerINDUSTRIALPrime Dublin 130 65 WeakerSecondary Dublin 100 54 WeakerPrime Provincial 90 43 WeakerPrime rent refer to a headline rent for a prime (well specified, well-located) property let to a strong tenant(s), on a lease of 10 yrsunexpired & open market rent reviews (upwards or downwards)Retail Shops assumes a min size of 200 sq m of well-configured ground floor space with appropriate back of house accommodationRetail Warehousing assumes a min floor size of 1,000 sq mSq. M : Sq. Ft: = 1 : 10.76Prime Provincial refers to Cork, Galway, Limerick & Waterford only.

Capital Markets – Guy Hollis

Irish Commercial Investment in Europe12,000UK France Germany Benelux CEE Ireland Other10,000€ Millions8,0006,0004,0002,00002001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source | CBRE Research

Irish Investment 2003 – 20113,5003,00099€ Millions2,5002,000119791,5001,000500073802929 8132003 2004 2005 2006 2007 2008 2009 2010 2011Source | CBRE Research

Irish Capital Value IndexAverage peak-to-trough decline of 64.7%700Retail Office Industrial6005001994 = 1004003002001000Dec-84Dec-85Dec-86Dec-87Dec-88Dec-89Dec-90Dec-91Dec-92Dec-93Dec-94Dec-95Dec-96Dec-97Dec-98Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11Source | IPD

Irish Returns 2008 – 2011 (Quarterly)Values continuing to decline5Total ReturnCapital Growth0-5-10-15-20Mar-08Jun-08Sep-08Dec-08Mar-09Jun-09Sep-09Dec-09Mar-10Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11Source | IPD

STRENGTHS• Confirmation that Government are notproceeding with rent review reform & othermeasures announced in Budget 2012 hasremoved uncertainty and should stimulatetransactional activity this year• Capital values expected to stabilise in 2012• Prime yields should strengthen over thecourse of the year• Demand from international and local buyersIrish Investment MarketWEAKNESSES• Ireland’s reputation tarnished by economicand banking sector issues which may detersome international investors• Values will only stabilise when there issufficient transactional evidence to provideclarity on pricing• Investors only focussed on primeOPPORTUNITIES• There will be an increase in the disposal ofloan portfolios and an increase in the sale ofresidential investment portfoliosTHREATS• Yields for non-prime properties will continueto soften despite values for prime propertiesstrengthening• Opportunities for NAMA and other entities toprovide vendor finance in the absence ofdebt finance• Key focus on preserving and enhancingvalues through intensive asset management

Value of Hotel Transactions in Ireland1,1001,00032900800700€ Millions60050026261040030020010002 32005 2006 2007 2008 2009 2010 20118

The Hotels MarketSTRENGTHS• Improvement in hotel performance data in2011, particularly in Dublin• Improvement in transactional activity• Strong international appetite for primeDublin hotels• Reduction in stamp duty from 6% to 2% andcapital gains tax changes should lead tomore hotels being sold in 2012• Increase in tourist numbers anticipatedOPPORTUNITIES• If NAMA provide vendor finance to the hotelsector, it would facilitate transactionalactivity in this sector• Pragmatic approach to disposing of hotelsthat are realistically unable to trade theirway out of difficulty will result in sales beingachieved. There are domestic investorswho will purchase hotels if they arecompetitively priced.WEAKNESSES• Over 70 hotels in receivership around thecountry• Many hotels continuing to trade, regardlessof profitability or trading prospects• Improvement in tourist activity focussed onDublin• Lack of funding to facilitate hotel purchasesTHREATS• Room rates in Dublin have stabilised butthere is still pressure on room rates outsidethe capital• A lack of capital expenditure and scarcity ofworking capital for repairs and maintenanceleading to deterioration of stock in somelocations.

Ireland Equivalent Yield ForecastsPeak February 2012 TrendingRETAILYield % Yield %SHOPSPrime High Street 2.50 6.25 StrongerGood Secondary High Street 3.50 8.00 StrongerPrime Provincial High Street 3.25 8.00 StableSHOPPING CENTRESPrime 3.50 8.50 StrongerSecondary 4.25 10.00 WeakerRETAIL WAREHOUSESPrime 4.25 8.75 StrongerSecondary 5.00 11.00 WeakerOFFICESPrime City Centre Dublin 3.75 7.25 StrongerSecondary City Centre Dublin 4.25 9.00 StableSuburban Dublin 5.00 9.50 StablePrime Provincial 5.75 10.00 WeakerINDUSTRIALPrime Dublin 4.75 9.50 StrongerSecondary Dublin 4.75 11.00 WeakerPrime Provincial 5.75 12.00 WeakerPrime Yields refer to an equivalent yield for a prime (well specified, well-located and rack-rented) property let to a strong tenant(s),on a lease with 10 years unexpired and open market rent reviews (upwards or downwards)Prime Provincial refers to Cork, Galway, Limerick and Waterford only.

2012 | TOP 10 PREDICTIONS

2012 | Top 10 PredictionsPrime rents will stabilise but rents for secondary properties willcontinue to decline. Huge focus on lease re-gearingCapital value declines will come to an end. Prime yields willstrengthen but secondary yields will weaken furtherTake-up in the occupier markets will weaken as some strategicleasing decisions are put on holdSome retailers will have to reassess their options now that upwardonly rent review legislation will not proceedThere will be a notable increase in the volume of transactions in theinvestment, hotels and development land sectors. At the prime end,overseas investors are likely to be most dominantCBRE | Page 53

2012 | Top 10 PredictionsThere will be an increase in the disposal of loan portfolios over thenext 12 monthsThere will be an increase in the sale of residential investmentportfolios – a new trend for IrelandThere will be no new development activity in the commercial sectorother than where pre-lettings have been agreedAny decline in the overall vacancy rate in the Dublin office marketwill be countered by buildings coming back onto the market to letas companies consolidate operationsThe prevalence of functionally obsolete accommodation is going tobecome increasingly evident in all sectorsCBRE | Page 54

Prime Office Yields Q4 2011 vs. High/Low in Current Cycle8.007.507.006.506.005.505.004.504.003.503.00Current Yield Cyclical Low Cyclical HighLondon -ZurichGenevaParis Ile-de-StockholmMunichHamburgCopenhagenFrankfurtBerlinDusseldorfOsloViennaMilanLondon -AmsterdamHelsinkiRomeBarcelonaMadridManchesterBirminghamEdinburghGlasgowBrusselsWarsawPragueBudapestDublinLisbonCBRE | Page 55

Property Related Tax IssuesEnda FaughnanTax Partner, PwCEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 56

Property Related Tax Issues1. Investment structures under stress2. Update on property reliefs3. New CGT exemption on property4. Impact on property structures5. Miscellaneous Finance Bill measuresEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 57

Property Structures• Typical investment model- Borrow and hold property personally- Receive rent from tenant- Use interest payment and property tax shelter (Section 23 / capitalallowances schemes) to limit tax on rent- Gross rent typically available to pay down debt and interest- One 20% tax hit on saleEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 58

Property StructuresTraditional Models under stress• Significant change in tax regime- High earner restrictions introduced in 2007- Interest expense on residential property curtailed- Further high earner restrictions in 2010 – limits tax breaks to €80k or20% of income- Universal Social Charge – applies before deducting capital allowances- Marginal personal tax rate increase – 46.5% -> 55%- Property relief restrictionsEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 59

Update on property reliefsLast year’s proposals• Section 23 type reliefs and capital allowances ring-fenced to rentalprofit from specific property investment – Budget 2011• Unused relief cannot be carried forward beyond 7 or 10 year holdingperiod – Budget 2011• Significant lobbying re commercial implications• Subjected to a commencement order (following preparation andpublication of an economic impact assessment) – Finance Bill 2011Emerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 60

Update on property reliefsWhere are we now?Budget2011FB2011* 1 FB 2012Section 23 type reliefs and capital allowances ringfencedto rental profit from specific propertyinvestment XUnused relief cannot be carried forward beyond 7 or10 year holding period (applies to Capital Allowancesonly) Abolition of all property reliefs from 2014USC levy of 5% on reliefs claimed(income > €100k)X * 2N/A N/A*1 FB 2011 was subject to a commencement order*2 Except s23 and some schemes which have not yet reached the end of their tax lifeEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 61

Update on property reliefsExample2006 2012 2015?€ € €Net rent 600k 500k 500kTax shelter 600k 100k NILTaxable profit NIL 400k 500kTax (164k) (205k)USC NIL (50k) (50k)PRSI (16k) (20k)5% levy on shelter (5k) N/ANet Cash 600k 265k 225k?Effective tax rate 0% 47% 55%?Emerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 62

Possible Re-Structuring?1. Review and assess existingstructures in light of all the changes2. Cash flow analysis up to andbeyond 20143. Consider alternative ownershipstructures4. Consider all the issues arising –commercial and taxEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 63

CGT exemption on property• Applies to property in an EEA country• Property acquired between 7 December 2011 and 31 December 2013• Property must continue to be owned for at least 7 years from date ofacquisition• Proportion of gain attributable to the 7 year period will be exempt.Emerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 64

Impact on Property StructuresIrish resident investors• Acquire Irish property personally– no CGT if conditions satisfied• Acquire EEA property personally– no CGT, e.g. UK property noIrish or UK CGT.• Property held through a company- CGT on liquidation of companyor sale of sharesEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 65

Impact on Property StructuresForeign Investors• Acquire Irish property directly – no CGT• Acquire Irish property through company –no CGT if company sells property• Ireland now compares favourably withother jurisdictions – many locations chargeCGT on property gains• Up to now QIF the favoured structure• Now, offshore company is in playEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 66

Offshore CompanyNon ResidentInvestorOffshoreCompany• No CGT on sale (once held for 7 years)• Financing costs deductible againstrent• Profit rent taxable @ 20%• Should be no withholding tax on unwind• Suitable for Irish resident investors ???Real EstateEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 67

QIF• QIF the preferred option for large scale investments- Full tax exemption for gains and profit rent- No withholding tax on profit repatriation to non residents- Irish investors need to manage anti-avoidance rulesEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 68

Miscellaneous Finance Bill Measures• Reduction in stamp duty rates to flat 2%• Increase in CGT and CAT rates from 25% to30% (from 7.12.11)• Retirement relief changes• Taxation of receivers• REITs and Alternative Investment CompanyEmerging Trends in Real Estate Europe 2012PwCFebruary 2012Slide 69

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